With a 7% dividend yield, are NAB shares a buy?

Can investors bank on an appealing dividend from NAB?

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Is the National Australia Bank Ltd (ASX: NAB) share price a buy? I'm going to look at that question from a passive income perspective, with the ASX bank share offering a grossed-up dividend yield of 7%.

What dividends could the ASX bank share pay?

In the last 12 months, we have seen the company make sizeable increases in its dividends. The FY23 final dividend was increased by 7.7% to 84 cents per share, while the FY23 half-year dividend was increased by 13.7% to 83 cents per share.

The last two dividend payments amount to $1.67 per share, which is a grossed-up dividend yield of 6.9%.

However, those dividend payouts are history. The next 12 months are more important to focus on because they're the next payments we'll see.

According to the projection on Commsec, owners of NAB shares are predicted to receive a slight increase of the annual payout to $1.68 per share – this would be a grossed-up dividend yield of roughly 7%.

Is the NAB share price appealing?

As we can see on the chart above, the NAB share price has made rapid progress since the start of December 2023. This is great for existing shareholders, but prospective investors are now getting a lower potential dividend yield. How does that work? For example, if the NAB dividend yield was 8% and then the NAB share price rises 10%, the dividend yield reduces to roughly 7.3%.

Not only is the dividend yield pushed down, but the price/earnings (P/E) ratio has increased, meaning we have to pay more for the same amount of earnings generated by the company.

The projection on Commsec suggests NAB may generate earnings per share (EPS) of $2.25 in FY24, which means it's now valued at 15 times FY24's estimated earnings.

This higher NAB share price comes at a time when household loan arrears are rising, there is strong competition in the lending space, NAB is paying more to savers and credit growth is slow.

FY23 saw a credit impairment charge of $802 million, compared to an FY22 charge of $125 million. The increase in underlying charges primarily reflects "volume growth, a deterioration in asset quality and higher specific charges off a low base".  

I do rate NAB highly compared to other domestic ASX bank shares – I think it has been quality under the leadership of Ross McEwan, but it's cheaper than Commonwealth Bank of Australia (ASX: CBA) on a P/E ratio basis.

However, I wouldn't call NAB a great buy today after the strong recent rise amid challenging economic conditions. Instead, there are other ASX dividend shares in different sectors I'd rather go for.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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